Why to invest in tax saving mutual funds

Why to invest in tax saving mutual funds

As one new financial year has started everyone wants lower the tax for coming year. There are some ways by which one can lower the tax burden by investment. There are plenty of tax-saving investment options available to you to claim a tax deduction; Public Provident Fund (PPF), National Savings Certificate (NSC), Tax-saving five-year term deposit, National Pension Scheme (NPS), among others. Here we would tell you why Equity Linked Savings Scheme (ELSS) or tax saving/planning  mutual funds are best options for tax planning.

The long term returns from ELSS is tax free, because they are equity oriented investments. As the name suggests the investment is majorly made in equities and has a lock in period of 3 years. It is the lowest period compared to PPF; NPS and FD’s as they have 15 years and 5 years respectively. In  ELSS, Amount can be invested in SIP i.e monthly small amount can be invested and same tax benefit can be claimed.  No taxes are applicable in investment, accumulation and withdrawal of ELSS. Thus, helps in saving taxes all ways.

Investments get tax deduction under Section 80C, so you don’t have to pay tax on the amount invested in the ELSS fund. The capital gains generated by the fund are also exempt from tax as the investments are not withdrawn. Finally, withdrawals are also tax-free because there is no tax payable on long-term capital gains from equity-oriented mutual funds. The dividends received to unit holders from mutual fund is also tax free. 

One can start with investment in ELSS with minimum rs 500 and there in no maximum limit but u/s 80C its Rs 1 lac only.

It's a smart way of TAX SAVING WITH WEALTH CREATION.

Meanwhile NPS and PPF are more of a retirement plans rather than investment ones. They have partial exposure to equity and have very long lock in periods.

ELSS investment is suitable for all types of investors for small, medium to high earnings investors.

For ELSS there is no maturity date of investments.

One can continue investing in them even after the lock-in period has expired, with or without further contributions. This is an important advantage for ELSS funds because here you earn returns from the power of compounding. You keep generating returns on the invested money even if you stop investing further. Another plus point of ELSS funds is that you can stop investing in them any time you want. There is no compulsion to keep investing in an ELSS fund.

Diversification is an important feature of equity mutual funds. The fund itself builds its portfolio by investing in stocks of different market capitalization and companies from different sectors. This means your investments are made across the market, with a professional fund manager making the investment choices for you. You can also diversify across fund houses and investment styles by putting your money in more than one ELSS fund. Furthermore, you can even stop investing in an under performing fund at any point and start investing in another one.